Peak Oil: Update

"Peak Oil" has been the theory that the US, in particular and the World, in
general would run out of oil reserves. Such theories depend upon supply/demand
analysis that for centuries market forces have demonstrated as inadequate.
The dynamics of financial history move faster than fundamental research can
deal with.

Peak Oil is not the only example. The "Coal Question" was a serious concern
in the 1860s. Growing population and expanding industry made a shortage of
coal inevitable. Stanley Jevons was England's leading economist and had a personal
revelation that coal reserves would soon run out. Civilization, as appreciated
then, would collapse.

What is fascinating is that an era of soaring prices prompted fanciful theories
about permanent shortages and charismatic leaders ran with the alarm. Peak
Oil and Peak Coal are essentially the same story and the intensity of the latter
faded as the financial bubble of 1873 crashed. This marked the beginning of
a Great Depression. During the late 1800s crude oil became a commercial source
of energy that "Coalists" did not see.

This time around, crude oil prices soared with "Peak Oil" convictions and
collapsed as a great financial bubble failed in 2008. Traditional reserves,
which were diminishing have been more than replaced by technical innovations
that made shale deposits economical. "Peakests" became deniers.

Jevons was a competent researcher and had calculated all of the known coal
reserves in England and Europe. Right down to a mining depth of 4,000 feet.

His book was published in 1865 and was called The Coal Question: An Inquiry
Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines.

One of the salient observations was "Coal in truth stands not beside but entirely
above all other commodities. It is the material energy of the country - the
universal aid - the factor in everything we do. With coal almost any feat is
possible or easy; without it we are thrown back into the laborious poverty
of early times.".

The book also included "This is a question of almost religious importance
which needs the separate study of every intelligent person.".

Coal reserves have yet to run out, and the instruction from its commercial
history may have tempered the conclusions of supply/demand analysis in petroleum
reserves. But did not.

Early Comments:

In 1914, the Bureau of Mines reported that U.S. oil reserves would be exhausted
by 1924.

"Production of oil cannot long maintain its present pace."

- 1922 Federal Commission

In 1939, the Interior Department said that the World had only 13 years of
oil reserves.

"Oil production will peak by 1985."

- April 18, 1977, President Carter

Comments at the Peak:

"And to the Peakests I say. You can declare victory. You are no longer
the beleaguered small minority of voices crying in the wilderness. You
must learn how to take "yes" and be gracious in victory."

- President, International Association for the Study
of Peak Oil, 2007

"OPEC has already done what OPEC can do and oil prices will not come
down."

- OPEC President, Chakib Khelil, June 24, 2008

Recent Comments:

"The Last Post"

- The Oil Drum, September 22, 2013

A "Peak Oil" website was shut down.

At times of great excitement in any commodity, either at bottoms or peaks,
it is price action that clears the market. Although widely popular, supply/demand
research lags the important turns in price for all commodities.

Over the last couple of decades, technical analysis has improved a lot and
our work as the price surged to 147 in 2008 is worth reviewing.

Our ChartWorks developed a proprietary model in 1999 designed to recognize
the characteristics of significant tops and bottoms. Tops are called Upside
Exhaustions and bottoms Downside Capitulations. Often such dynamics will occur
within a seasonal move.

That was the case in with the rally in natural gas that would likely top around
June 2008.

The high for natural gas was 13.69 at the end of that June. As part of the
energy play, the action in coal stocks also accomplished a Weekly Upside Exhaustion.

An important over-riding feature was that our work on credit markets had concluded
in June 2007 that "The greatest train wreck in the history of credit" had begun.

A couple of paragraphs from our "Pivots" through the violence of "Peak Oil" follow.

"On crude oil, last Friday's Pivot noted that the biggest Upside Exhaustion
signal since Iraq's invasion of Kuwait in 1990 had been accomplished.
That was on the Weekly and it was also noted that the Monthly was working
on the biggest signal since the sensational high of 1980."

- Pivot July 10, 2008

"For crude, this is a cyclical high and if the Monthly Exhaustion
is accomplished it would be a secular peak. In so many words - Peak Oil."

- Pivot, July 24, 2008

Where Are We Now?

Although the business cycle has been the weakest since the 1930s, it has run
for almost 5 years since the crash ended in 2009. The bull market for stocks
and lower-grade bonds has become measurably speculative - at fully 5 years.

Quite likely the cyclical best is being accomplished.

On the last recession crude oil prices crashed from 147 in 2008 to 33.5 in
March 2009.

The next bull market made it to 114.83 in April 2011. That top was accompanied
by the most overbought on the Weekly RSI since 2008. Also there was the signal
from our Momentum Peak Forecaster that we took as the cyclical peak for base
and precious metals as well as for crude prices.

Base metal and agricultural prices declined by more than 30%. Silver prices
plunged by more than 50%. Oil prices declined 11% from 115 in 2011 to 100,
recently.

In the face of the cyclical bear market for most commodities, crude's relative
performance has been outstanding. Buoyancy was provided by "Peak Oil" and the "Middle
East", which views had become institutionalized.

The following chart shows the remarkable rise in American shale-oil production
since 2011.

The equivalent is taking place essentially around the world.

Mineral extraction has enjoyed outstanding technological innovations. Bulk
mining of low-grade copper porphyrys began in the early 1900s. Such mining
of other base and precious metal deposits followed. Then there was the development
of heap-leach mining of low-grade gold deposits. Strip mining of metallurgical
and thermal coal is yet another example of technological revolution.

The unprecedented increase in productivity has materially helped those who
work to support the governing classes and their dependents.

It is technical analysis and historical research that prompted our 2008 call
that Peak Oil was over.

Technically, crude oil is only moderately overbought and at 102 is breaking
above resistance at 100 set in December and 101 set in September.

Action in natural gas has been outstanding with the Weekly RSI up to 76. This
compares to 77 reached on July 4th 2008. The high price was 13.60, which was
shy of the peak of 15.78 set in 2005.

Because of its impressive dynamics natgas could be the guide to the play.
Seasonal tendencies are favourable and the run could continue into spring.

It is worth reviewing the low of last summer, which opportunity we missed.
On August 21st, Climate Depot reported that for the period from July 24 to
August 19 there were 2899 weather stations that recorded record low temperatures.
There were only 667 stations that reported record highs. That was for the summer
within the contiguous United States. Natgas low was 3.13 on August 9th. The "Polar
Vortex" was not in the headlines.

For January, the tally was 4408 stations with record lows and 1259 with record
highs. For what it's worth, there were 1093 stations with snowfall records.

Occasionally, we have mentioned that at some time crude oil could suffer a
decline in its trading range similar to that suffered by natural gas. This
is an attempt to place this possibility in perspective. Hopefully within a
month or so of the top.

The opinions in this report are solely those of the author.
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